Changing Global Energy Landscape with US Shale Gas – Part II

In mid- 2012, Kinder Morgan’s acquisition of El Paso for $38 billion,  resulted in a combined company called Kinder Morgan, Inc which is the largest operator of natural gas pipelines in the U.S. with 22% of the U.S. natural gas pipeline network,  connecting almost every gas field and consuming market in the U.S. The expanded pipeline network resulting from the Kinder Morgan-El Paso deal is expected to be especially significant in supplying gas to higher-priced electricity markets such as New York and Florida. The expanded pipeline network will permit the natural gas "bubble" to move downstream, in enough abundance to stimulate new products and locations.

This deal was a game changer because thousands of wells drilled to produce the record-setting "bubble" now have a record-setting pipeline network to get to market. This transaction affirms the potential of the shale gas discoveries, while countering apprehensions regarding stability of the natural gas market.

Sasol has announced a $10-billion facility in Louisiana to manufacture diesel fuel from natural gas, thus creating a new market for Haynesville Shale gas. That's not all. Dow has announced plans to build shale gas downstream capacities based on ethane and propane on the Gulf Coast, and Shell has also made known of their plans to build an ethylene cracker in Appalachia near the Marcellus Shale.

There are domestic and export implications for liquefied natural gas (LNG) as well. Last year, Cheniere Energy was the first company in 35 years to receive export approval for LNG from its Sabine Pass liquefaction facility and has signed an $8-billion contract with BG for supplying LNFG and another one with Spain's Gas Natural Fenosa for a total 7 million tons/year of LNG over 20 years.

The LNG exports are likely to be directed primarily to Asia, where in addition to the strong demand for LNG, the prices being paid for LNG are four times as high as the prices in the U.S. This demand for LNG in Asia is dominated by Japan and South Korea . These two countries together imported 64 percent of global LNG. Japan is replacing nuclear electricity generation capacity lost as a result of the earthquake and tsunami with LNG. Additional demand comes from China and India. China's import of LNG has increased considerably, driven by demand for electricity generation and air quality concerns. The oil companies of India &China have made significant investment in U.S. shale plays in an attempt to bring in supply to their own markets.

The tide has turned — the U.S. is on its way to being not only the supplier of the world's LNG, but other fuels as well. The U.S. is already on course this year to be a net exporter of gasoline, diesel and other fuels for the first time since the post-World War II economy of 1949 — a prospect that was unimaginable even a few years ago.

Guest Post

Related Post:
Changing Global Energy Landscape with US Shale Gas - Part I (prepforum.wordpress.com)

Changing Global Energy Landscape with US Shale Gas – Part I

In the year 2009, United States surpassed Russia to become the world's leader in natural gas production, with production continuing to increase to 80 billion cubic feet/day in 2012. U.S. natural gas reserves are at their highest point since 1971, and year-on-year reserve additions doubled from 2010 to 2011, as a result of shale production. Shale gas, a natural gas found trapped in sedimentary rocks, made up only 1 % of U.S. natural gas production in 2000. It now amounts to 25 % of U.S. natural gas production and is expected to increase to nearly 50 % by 2035.  

Natural gas, cost-competitive with coal at half the carbon emissions, is becoming the fuel of choice for electricity generation. New EPA regulations on particulates, mercury, and other toxic emissions are forcing the closure or retirement of 28 GW or more of coal-burning capacity, or about 8.9 percent of total U.S. coal-burning capacity. Recent increases in coal transportation costs are also problematic for coal. In addition, demand for electricity is forecast to exhibit slow but steady growth over the next few decades. These factors, taken together, are expected to be the primary driver of demand for natural gas in electricity generation over the next several decades. Utilities and end users are choosing the lower emissions and lower capital requirements of natural gas-fired facilities over other fuels, sending the clear message that the risk of natural gas price volatility is a risk worth taking in the current difficult policy environment for coal.

The U.S. Energy Information Administration (EIA) estimates that 223 GW of new generation capacity will be needed between now and 2035, and that at least 60 percent of capacity additions are expected to be natural-gas-powered. However recently EIA has conceded that “the shale oil and shale gas resource estimates are highly uncertain and will remain so until they are extensively tested with production wells”, thus raising concerns the prospects of shale gas. Industry consultants and federal energy experts have privatelyvoiced scepticism about shale gas prospects. 

Scepticism also arises mainly due to the lack of marketability that has not only kept the natural gas price below $4/MMBTU, it has even resulted in the flaring of more than one-third of produced natural gas in 2011 in North Dakota. Without a pipeline, natural gas is not marketable. It's immobile, "stuck" near the production site. Pipelines are long-term investments that generate low returns. Revenue to the pipeline operators is generated by transmission fees on long-term contracts, insulating the operators from fluctuations in the natural gas commodity price.  

Notwithstanding the cynicism,  shale resources and other upstream assets continue to drive U.S. merger and acquisition activity, attracting foreign investors in the process.  In the next part we will look into some deals that validate that the potential of the shale gas discoveries.

Guest Post.

Related Post:
Changing Global Energy Landscape with US Shale Gas - Part II